You can check out anytime – but can the clients follow?

WOULD the City be better if it was more like California? Obviously, the sunshine and beaches would be nice. But what about the Golden State’s employment law?

Restrictive covenants (RC) are contracts that many people in the City sign when they start a job, which tell them what they can and can’t do when they come to leave that employer. Typically, they’ll say that you aren’t allowed to take clients or other members of your team with you. A high-profile RC case recently dealt with the dispute following the departure of seven advisers from financial adviser Towry for rival Raymond James. A number of clients followed the advisers and Towry claimed that the clients had been solicited – which was forbidden by the advisers’ employment contracts, but the court disagreed.

The case also raised a fundamental point about RCs – namely, are they worth the paper they’re printed on? Many in the City think not. The winning side’s lawyer in the Raymond James case has published a wide-ranging report about them, which I helped to write. We found that 14 per cent of the 116 City firms questioned said that they didn’t use RCs at all, while 28 per cent believed that they were unenforceable. Over a third had never even written to a former employee to try to enforce them. The report concluded that RCs do work, but only if they are regularly updated and if you are willing to spend the money enforcing them.

Which raises the Silicon Valley issue. A Cambridge professor of law interviewed in the report pointed out that RCs are unenforceable in California. In many respects the City, with its highly-mobile, talented employees, resembles Silicon Valley. So if they don’t need them there, he asked, do we need them here? Already some opt not to use them. One barrister said that in the more “testosterone-fuelled” end of the City, RCs are seen as weak. Why would an employee want to leave us? And why on earth would a client want to go to a so-called rival? A laissez-faire attitude prevails there. Why not everywhere?

Of course, firms might be less inclined to pay top-dollar if they knew that you could zip off to a competitor any moment. And since RCs are recognised in English law, they are here to stay. But they could still be simplified. Instead of using the courts as the final backing for RCs, they could make use of the employee’s rational self-interest. The rise of deferred remuneration gives former employers a hold over staff even after they have left, and a simple clause threatening to turn off the tap if they, say, poach clients, would be a simpler way to get the effect of the currently complex RCs. This is becoming common practice at some firms. Obviously, smart lawyers would still be needed, but time-consuming and complicated litigation could be avoided. A little bit of California dreaming might be better than a Hotel California that never lets clients leave.

How to Lose Friends, Keep Clients and Influence People was commissioned by Faegre Baker Daniels and undertaken by Jures. The report is available at: www.faegrebd.com/18045